Interest Rates and Forex

Crucially, they decide the cost of the cheapest money available to borrowers in a nation. If the central bank decides to raise rates, borrowing will be harder, and economic activity may slow down, which might lead to the depreciation of the currency in the long term, all else being equal. The lowering of rates may boost economic activity, as more corporations and consumers can borrow at cheaper rates and invest in the buoyant economic atmosphere that emerges. Interest rates also have an important role in initiating the different phases of the credit cycle. Higher interest rates may cause many borrowers to default which can cause banks to contract credit to protect their balance sheets, and all that can lead to recessions, or an economic slowdown. All of that, of course, has important consequences for forex trends. Finally, apart from their direct consequences on trade and economic activity.